The rise of the networked enterprise: Web 2.0 finds its payday

1. 1
D EC EM B ER 2010
m c k i n s e y g l o b a l i n s t i t u t e
The rise of the networked enterprise:
Web 2.0 finds its payday
McKinsey’s new survey research finds that companies using the
Web intensively gain greater market share and higher margins.
Jacques Bughin and Michael Chui

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Every new technology has its skeptics. In the 1980s, many observers doubted that
the broad use of information technologies such as enterprise resource planning (ERP) to
remake processes would pay off in productivity improvements—indeed, the economist
Robert Solow famously remarked, “You can see the computer age everywhere but in the
productivity statistics.”1 Today, that sentiment has gravitated to Web 2.0 technologies.
Management is trying to understand if they are a passing fad or an enduring trend that
will underwrite a new era of better corporate performance.
New McKinsey research shows that a payday could be arriving faster than expected. A new
class of company is emerging—one that uses collaborative Web 2.0 technologies intensively
to connect the internal efforts of employees and to extend the organization’s reach to
customers, partners, and suppliers. We call this new kind of company the networked
enterprise. Results from our analysis of proprietary survey data show that the Web 2.0 use
of these companies is significantly improving their reported performance. In fact, our data
show that fully networked enterprises are not only more likely to be market leaders or to
be gaining market share but also use management practices that lead to margins higher
than those of companies using the Web in more limited ways.
Over the past four years, McKinsey has studied how enterprises use these social
technologies,2 which first took hold in business-to-consumer models that gave rise to
Web companies such as YouTube and Facebook. Recently, the technologies have been
migrating into the enterprise, with the promise of creating new gains to augment those
generated by the earlier wave of IT adoptions.3 The patterns of adoption and diffusion
for the social Web’s enterprise applications appear to resemble those of earlier eras: a
classic S curve, in which early adopters learn to use a new technology, and adoption then
picks up rapidly as others begin to recognize its value. The implications are far reaching:
in many industries, new competitive battle lines may form between companies that use
the Web in sophisticated ways and companies that feel uncomfortable with new Web-
inspired management styles or simply can’t execute at a sufficiently high level (see sidebar,
“Managing the Web-based organization”).
The findings
Our annual surveys of Web 2.0 use in the enterprise provided the basis for the findings
in this article. The present survey, our fourth, garnered responses from 3,249 executives
across a range of regions, industries, and functional areas. Two-thirds of the respondents
reported using Web 2.0 in their organizations. As in past surveys, we asked respondents
1
Robert M. Solow, “We’d better watch out,” New York Times, July 12, 1987.
2
See “How businesses are using Web 2.0: A McKinsey Global Survey,” mckinseyquarterly.com, March 2007; “Building the Web
2.0 Enterprise: McKinsey Global Survey Results,” mckinseyquarterly.com, July 2008; “How companies are benefiting from
Web 2.0: McKinsey Global Survey Results,” mckinseyquarterly.com, September 2009; and Michael Chui, Andy Miller, and
Roger P. Roberts, “Six ways to make Web 2.0 work,” mckinseyquarterly.com, February 2009.
3
Andrew McAfee, Enterprise 2.0: New Collaborative Tools for Your Organization’s Toughest Challenges, Boston, MA: Harvard
Business School Press, 2009.

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Managing the Web- Respondents report that a variety of corporate sources, and discretionary
based organization organizational structures and units funds at the business unit level.
manage Web 2.0. This year’s results
show that the IT department is most The social nature of most Web
likely to oversee internal Web initiatives technologies, of course, opens
(61 percent of respondents). For companies to greater interaction with
customer-facing initiatives, 74 percent of the outside world. To manage this
respondents say that oversight falls to change, a slim majority of respondents
the marketing department. For Web 2.0 (51 percent) say their companies have
initiatives involving external suppliers adopted formal social-media policies;
and partners, roughly equal numbers companies with higher levels of Web
of respondents cite the IT, marketing, 2.0 adoption are likelier to have them. In
and business-development functions. most cases, only a few employees are
Financing comes from a variety of authorized to speak on behalf of the
places, including the IT function, central company.
about their patterns of Web 2.0 use, the measurable business benefits they derived from
it, and the organizational impact of Web technologies. We also inquired about the market
position of the respondents’ companies, whether their market share had changed, and how
their operating margins compared with those of competitors in the same industries.
Web 2.0 technologies are now more widely used
The share of companies where respondents report using Web 2.0 technologies continues
to grow. Our research, for instance, shows significant increases in the percentage of
companies using social networking (40 percent) and blogs (38 percent). Furthermore,
our surveys show that the number of employees using the dozen Web 2.0 technologies
continues to increase. 4 Respondents at nearly half of the companies that use social
networking say, for example, that at least 51 percent of their employees use it. And in 2010,
nearly two-thirds of respondents at companies using Web 2.0 say they will increase future
investments in these technologies, compared with just over half in 2009. The healthy
spending plans during both of these difficult years underscore the value companies expect
to gain.
Among respondents at companies using Web 2.0, a large majority continue to report that
they are receiving measurable business benefits—with nearly nine out of ten reporting
at least one. These benefits ranged from more effective marketing to faster access to
knowledge (Exhibit 1).
4
For more details, see “Business and Web 2.0: An interactive feature,” mckinseyquarterly.com, December, 2010.

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MoBT 2010
Web 2.0
Exhibit 1 of 3
Exhibit 1 A majority of respondents say their companies enjoy
measurable business benefits from using Web 2.0.
% of respondents whose companies are achieving specified benefits from their use of Web 2.0 technologies1
Median improvement, %
Internal purposes, Customer-related Working with external
n = 1,598 purposes, n = 1,708 partners/suppliers, n = 1,088
Increasing Increasing
Increasing effective-
speed of access 77 30 63 speed of access 57 20
ness of marketing
to knowledge to knowledge
Awareness 20
Reducing Consideration 15 Reducing
communication 60 10 communication 53 15
Conversion 10
costs costs
Loyalty 10
Increasing satisfaction
Increasing speed of suppliers, partners, 45 20
Increasing customer
of access to 52 30 50 18 external experts
satisfaction
internal experts
Increasing speed
of access to 40 25
Decreasing Reducing external experts
44 20 45 15
travel costs marketing costs
Reducing travel
38 20
Increasing costs
Reducing
employee 41 20 35 10
support costs
satisfaction Reducing time to
market for products/ 28 20
services
Reducing Reducing
40 10 29 20
operational costs travel costs
Reducing supply
22 10
chain costs
Reducing time to Reducing time to
market for 29 20 market for 26 20
products/services products/services Reducing product-
22 15
development costs
Increasing number Increasing number
of successful of successful Increasing number
28 20 24 15 of successful
innovations for new innovations for new 20 15
products or services products/services innovations for new
products/services
Increasing revenue 18 15 Increasing revenue 24 10 Increasing revenue 16 11
1 Includes respondents who are using at least 1 Web 2.0 technology.
Toward the networked enterprise
We analyzed the shared characteristics of groups of organizations in our survey and
clustered them according to the magnitude of the business benefits respondents reported
from the use of Web 2.0 tools and technologies. Our analysis revealed striking differences.
Among respondents who say their companies are using Web 2.0, most (79 percent)
achieved a mean improvement of 5 percent or less across a range of business benefit
metrics (Exhibit 2). Respondents at the companies in this group report the lowest
percentages of usage among their employees, customers, and business partners; say that
Web 2.0 is less integrated into their employees’ day-to-day work than respondents at other

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MoBT 2010
Web 2.0
Exhibit 2 of 3
Exhibit 2 Different types of networked organizations
achieve different benefits.
Organizations by type of Web 2.0 usage
Developing, Internally Externally Fully
n = 1,711 networked, networked, networked,
n = 287 n = 100 n = 76
Benefits, mean Employee benefit
5 19 9 31
% improvement metrics
Customer benefit
4 8 19 24
metrics
Partner benefit
5 10 17 27
metrics
Degree of % of employees
33 42 47 47
usage using Web 2.0
% of customers
31 50 59 62
using Web 2.0
% of partners
42 53 59 66
using Web 2.0
Integration, % of Web 2.0 integrated into
21 49 53 70
respondents1 day-to-day work
Organizational Increased information
21 52 43 55
impact, % of sharing
respondents2
Less hierarchical
17 40 25 49
information flows
Collaboration across
10 31 14 41
organizational silos
Tasks tackled in
9 24 15 39
project-based way
Decisions made lower in
5 14 19 25
corporate hierarchy
Work performed by mix of
8 21 15 29
internal and external people
1 Specifically, respondents who reported Web 2.0 being very or extremely integrated into employees’ day-to-day work activities.
2Specifically, respondents who strongly agreed that these characteristics applied to their companies.
companies do; and are least likely to report high levels of collaboration or information
sharing across the organization. We call these companies, still learning the ropes of Web
2.0, the “developing” group.
Three types of organizations, however, seem to have learned how to realize a much higher
level of business benefits from their use of Web 2.0.
Internally networked organizations. Some companies are achieving benefits from
using Web 2.0 primarily within their own corporate walls. The survey results indicate
that companies in this group—13 percent of those using Web 2.0—derive substantial

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benefits from deploying these technologies in employee interactions. Respondents at such
organizations report a higher percentage of employees using Web 2.0 than respondents
at developing organizations do. Respondents at half of the internally networked
organizations reported that Web 2.0 is integrated tightly into their work flows, for
example, compared with only 21 percent of respondents at developing organizations. Web
2.0 also seems to promote significantly more flexible processes at internally networked
organizations: respondents say that information is shared more readily and less
hierarchically, collaboration across organizational silos is more common, and tasks are
more often tackled in a project-based fashion.
Externally networked organizations. Other companies (5 percent of those deploying
Web 2.0) achieved substantial benefits from interactions that spread beyond corporate
borders by using Web 2.0 technologies to interact with customers and business partners,
according to survey results. Executives at these organizations reported larger percentages
of their employees, customers, and partners using Web 2.0 than respondents at internally
networked organizations did. But the responses suggest that the internal organizational
processes of externally networked organizations are less fluid than those of internally
MoBT 2010ones.
networked
Web 2.0
Exhibit 3 of 3
Fully networked enterprises. Finally, some companies use Web 2.0 in revolutionary ways.
This elite group of organizations—3 percent of those in our survey—derives very high levels
of benefits from Web 2.0’s widespread use, involving employees, customers, and business
Exhibit 3 Statistical analyses offer insight into the relationship between
use of Web 2.0 tools and three core self-reported corporate-
performance metrics.
Web 2.0-related factors significantly correlated Correlation P-value (less
with corporate-performance metrics coefficient than 0.05 =
(higher = greater statistically
correlation) significant)
1. Market share gains Externally networked organization .427 .001
Fully networked organization .344 .019
Organizational collaboration: cooperation across .065 .026
organizational silos, more project-based handling of tasks,
less hierarchical information flows, and increased
information sharing
2. Operating margins Distributed decision making and work: decision-making power .075 .029
compared with those situated lower in corporate hierarchy, more working teams
of competitors composed of employees and people outside organization
3. Market leadership— Internally networked organization .182 .038
ie, first in industry
market share Organizational collaboration (see explanation above) .077 .011
Externally networked organization –.362 .008

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partners, according to the survey. Respondents at these organizations reported higher
levels of employee benefits than internally networked organizations did and higher levels
of customer and partner benefits than did externally networked organizations. In applying
Web 2.0 technologies, fully networked enterprises seem to have moved much further along
the learning curve than other organizations have. The integration of Web 2.0 into day-to-
day activities is high, executives say, and they report that these technologies are promoting
higher levels of collaboration by helping to break down organizational barriers that impede
information flows.
Capturing competitive advantage
Executives at the more highly networked companies in our survey reported that they
captured a broad set of benefits from their Web investments. A key question remained,
however: do these benefits translate into fundamental performance improvements,
measured by self-reported market share gains and higher profits?
We performed a series of statistical analyses to better understand the relationship between
our categories of networked organizations and three core self-reported performance
metrics: market share gains, operating profits, and market leadership. Exhibit 3 shows the
results.
Market share gains reported by respondents were significantly correlated with fully
networked and externally networked organizations. This, we believe, is statistically
significant evidence that technology-enabled collaboration with external stakeholders
helps organizations gain market share from the competition. They do this, in our
experience, by forging closer marketing relationships with customers and by involving
them in customer support and product-development efforts. Respondents at companies
that used Web 2.0 to collaborate across organizational silos and to share information more
broadly also reported improved market shares.
The attainment of higher operating margins (again, self-reported) than competitors
correlated with a different set of factors: the ability to make decisions lower in the
corporate hierarchy and a willingness to allow the formation of working teams comprising
both in-house employees and individuals outside the organization. These findings suggest
that Web technologies can underwrite a more agile organization where frontline staff
members make local decisions and companies are better at leveraging outside resources
to raise productivity and to create more valuable products and services. The result, the
survey suggests, is higher profits.
Market leadership, which we ascribed to those organizations where respondents reported
a top ranking in industry market share, correlated positively with internally networked
organizations that have high levels of organizational collaboration. Self-reported market

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leadership also, however, correlated negatively with externally networked organizations.
We believe it is unlikely that better interactions with external stakeholders lead to a decline
in market position. A more likely explanation for the data is that market leaders use Web
2.0 to strengthen internal collaboration, seeking to enhance the organizational resiliency
required to maintain their leadership positions. Market challengers, by contrast, may be
more focused on external uses of Web 2.0 to win customers from industry leaders.
Overall, we found that respondents at 27 percent of the companies in our survey reported
having both market share gains against their competitors and higher profit margins. That
kind of performance clearly makes these companies profit consolidators in their industries,
with earnings growing faster than the rest. Highly networked enterprises were 50 percent
more likely to fall in this high-performance group than other organizations were. This
finding suggests that the fully networked enterprise could become the benchmark for more
vigorous competition in many industries.
Moreover, the benefits from the use of collaborative technologies at fully networked
organizations appear to be multiplicative in nature: these enterprises seem to be “learning
organizations” in which lessons from interacting with one set of stakeholders in turn
improve the ability to realize value in interactions with others. If this hypothesis is correct,
competitive advantage at these companies will accelerate as network effects kick in,
network connections become richer, and learning cycles speed up.
Going forward
The imperative for business leaders is clear: falling behind in creating internal and
external networks could be a critical mistake. Executives need to push their organizations
toward becoming fully networked enterprises. Our research suggests some specific steps:
• Integrate the use of Web 2.0 into employees’ day-to-day work activities. This practice
is the key success factor in all of our analyses, as well as other research we have done.
What’s in the work flow is what gets used by employees and what leads to benefits.
• Continue to drive adoption and usage. Benefits appear to be limited without a base level
of adoption and usage. Respondents who reported the lowest levels of both also reported
the lowest levels of benefits.
• Break down the barriers to organizational change. Fully networked organizations appear
to have more fluid information flows, deploy talent more flexibly to deal with problems,
and allow employees lower in the corporate hierarchy to make decisions. Organizational
collaboration is correlated with self-reported market share gains; distributed decision
making and work, with increased self-reported profitability.

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Related thinking • Apply Web 2.0 technologies to interactions with customers, business partners, and
employees. External interactions are correlated with self-reported market share gains.
“Clouds, big data, and
So are internal organizational collaboration and flexibility, and the benefits appear to
smart assets: Ten tech-
enabled business trends to
be multiplicative. Fully networked organizations can achieve the highest levels of self-
watch” reported benefits in all types of interactions.
“How companies are
benefiting from Web 2.0:
McKinsey Global Survey The authors would like to acknowledge the important contributions of Angela Hung Byers and Martin Rouse.
Results”
Jacques Bughin is a director in McKinsey’s Brussels office; Michael Chui, based in the San Francisco office, is a senior
fellow of the McKinsey Global Institute. Copyright © 2010 McKinsey & Company. All rights reserved.
“How Web 2.0 is changing
the way we work: An
interview with MIT’s
Andrew McAfee”
“Rethinking knowledge
work: A strategic approach”
“Six ways to make Web
2.0 work”